An additional time extension for the Guarantee on Securitization of Non-performing loans: the GACS

Prepared by Cristian Sgaramella, Giovanni Bombaglio and Adele Zulliani

On 14 June 2021 were concluded the negotiations between the Italian Government and the European Commission, which began in March 2021, concerning the renewal for the fourth time, and therefore until 14 June 2022, of the Guarantee on the securitization of non-performing loans (the so-called GACS).

This is the first-request State guarantee granted on the senior tranches of securitizations with underlying loans qualifying as NPLs through which, in 2020 only, approximately €74 billion in non-performing loans were eliminated from the Italian banking system.

To provide a brief overview, the tool was created in 2015 (the year of the peak in NPE exposures) following an agreement between the Italian government and other EU countries. Specifically, the Italian Government, being unable to use bail out instruments for the management of non-performing loans, identified securitization as the tool with which to allow the banking market to achieve the objectives fixed by the Regulator.

Both under the original scheme and with reference to the latest renewal, the risk that the measure might be classified as State aid has been overcome, as GACS is indeed provided by the State, but against payment.

The Guarantee is given only against payment of a premium based on a basket of equity securities listed in accordance with the law and having the same rating as the senior notes.

Anyway, once again, the GACS was not extended to exposures classified as UtP (Unlikely to Pay, the so-called “probable defaults”), despite the strong demand from the market, especially from banks and major operators (special servicers, investors, etc.).

The key issue is the difficulty – currently – for rating agencies to adapt their assessment methodologies to exposures that have very specific features, both due to the structure of the transactions and the type of the operations (i.e., they are “live exposures” that would also need to be assessed about any new financing to be provided to the customer/debtor).

However, it appears reasonable to assume that the guarantee mentioned will soon be extended to UtP exposures following what happened in Greece, the only European country to have provided a State guarantee also for Unlikely to Pay with the Hercules plan.

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Cristian Sgaramella

PwC TLS Avvocati e Commercialisti